Whether you're an active cryptocurrency trader or have even dabbled in the word cryptocurrency, the IRS wants to know.
In fact, one of the first questions on Form 1040, which most people use to file their tax return, asks: “At any time in 2023, we will (a) (pay for any compensation, prize, or property or services); Do you want to dispose of it?”
This year, the term “digital asset” replaced the previously used “virtual currency”. The IRS defines a digital asset as “a digital representation of value recorded on a cryptographically secured distributed ledger or similar technology.” Examples include cryptocurrencies, stablecoins, and non-fungible tokens.
Most people who have never used digital tokens will likely be able to answer “no” to this question, but those who are active in the field of cryptocurrencies should exercise extreme caution, the official says. says Shehan Chandrasekera, accountant and head of tax strategy. Cryptocurrency tax software company CoinTracker.
“If you're in the crypto world and you're doing some sort of trading, it's really hard to say no to that question,” he told CNBC Make It. “The questions are very broad and capture a lot of things.”
If you check “Yes”
Here are five examples where you should check “yes” to the digital assets question on Form 1040.
- Turn your crypto into cash: If you sell cryptocurrencies or other virtual assets and receive cash, you'll need to report it on your taxes, Chandrasekera says.
- Trading digital coins: If you exchange one digital coin for another, such as exchanging Bitcoin for Ether, you must report it to the IRS.
- Earn cryptocurrencies: This can mean several things, such as if you receive digital assets as payment for goods or services, or if you earn rewards through methods such as staking. Validate the transaction.
- Cryptocurrency spending: If you use cryptocurrency to pay for goods or services, such as purchasing pizza.
- Crypto-specific activities: These are other activities that typically only occur within the crypto space and have not been mentioned before. For example, if you receive cryptocurrency as a result of an airdrop or hard fork, this will result in the blockchain being split into two branches, resulting in one cryptocurrency being split into two separate cryptocurrencies. .
If you check “No”
There are some cases where crypto traders can check “no”.
The answer can be “no” if you simply want to buy cryptocurrencies with fiat currency such as USD, hold cryptocurrencies in your own wallet, or transfer cryptocurrencies from one wallet you own to another. says Chandrasekera.
As always, we recommend consulting with a tax professional to discuss your specific situation to ensure you are filing the form correctly.
However, it would be a mistake to think that because the IRS cannot see your cryptocurrency transactions, you do not need to report them.
“There are many ways for the IRS to know that you have interacted with cryptocurrencies,” Chandrasekera says. “Failure to report will result in penalties.” These penalties can range from being subject to an audit to potentially criminal charges.
For more information on what is taxable when dealing with digital assets and how to report income from digital assets on your taxes, visit the IRS website.
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